Intangible Asset – IAS 38

Ø Understanding the accounting

treatment for intangible assets

Learning Ø Certain criteria for recognizing an

Objectives intangible asset
Ø Measuring the carrying amount of
intangible assets
Ø Disclosures
2
 Ø IAS 38 applies to all intangible assets
other than
§ Financial assets (IAS 32)
§ Exploration and evaluation assets (IFRS 6)
SCOPE
§ Expenditure on the development and Extraction of
minerals, oil, natural gas, and similar resources
§ Intangible assets arising from insurance contracts
issued by insurance companies
§ Intangible assets covered by another IFRS
3
 Definition of Intangible
Asset

Recognition & Measurement

Contents Amortisation

Derecognition

Disclosure
4
 Ø Intangible Asset:
An identifiable non-monetary asset without
physical substance
Definition Ø Critical attributes of an intangible asset:
§ Identifiability
§ Control
§ Future economic benefits

5
 Example Intangible
Asset
Ø patented technology, computer software,
databases and trade secrets
Ø trademarks, trade dress, newspaper mastheads,
internet domains
Ø video and audiovisual material (e.g. motion
pictures, television programmes)
Ø customer lists
Ø mortgage servicing rights
Ø licensing, royalty and standstill agreements
Ø import quotas
Ø franchise agreements An expense
Ø marketing rights 6
 v An asset is identifiable if it either
• is separable, ie is capable of being
separated or divided from the entity and
sold, transferred, licensed, rented or
Identifiability exchanged
• arises from contractual or other legal rights
v Note: Goodwill recognized in a business
combination is an intangible asset, but it is not
individually identified
7
 An entity controls an asset if the entity has
the power to obtain the future economic
benefits flowing from the underlying
Control resource and to restrict the access of others
to those benefits. Controlling future
economic benefits from an intangible asset
would normally stem from legal rights

8
 Example
v Market and technical knowledge may
give rise to future economic benefits.
Protected by legal rights such as
copyrights, a restraint of trade agreement
v An entity has a team of skilled staff that may be
able to bring future economic benefits, but the
entity usually has insufficient control
If it is protected by legal rights and to obtain
the future economic benefits from use it
9
 ◦ other
◦ revenue from
Future benefits
the sale of ◦ cost
economic resulting
products or savings
benefits from the use
services
of the asset

10
Recognition and Measurement

11
 An intangible asset shall be recognized
if, and only if
§ The definition of an intangible asset
Recognition and § it is probable that the expected future
Measurement economic benefits

§ the cost of the asset can be measured

reliably
An intangible asset shall be measured
initially at cost 12
 Acquision
of I.As
Internally
Acquired
generated
I.As
I.As
Issues for Goodwill
Separately Business
combination
R&D and is not an
other I.A
Regular purchase,
Government grant,
Asset exchange
13
 v The cost of a separately acquired
intangible asset comprises
= Purchase Price
+ (Import duties + Non-refundable
Acquired
Taxes)
Intangible
Assets - (Trade discounts + Rebates)
+ directly attributable cost (IAS 38.
28)
E.g: Franchises, patents, customer lists
and trademarks 14
 v Costs of employee benefits
Directly
attributable cost v Professional fees
v Costs of testing

15
 v Not include:
§ Costs of introducing a new product or
service (including costs of advertising and
Acquired promotional activities);
Intangible § Costs of conducting business in a new
Assets location or with a new class of customers
(including costs of staff training)
§ Administration and other general overhead
costs
16
 Brilliant Inc. acquires copyrights to the original recordings of a
famous singer. The agreement with the singer allows the
company to record and rerecord the singer for a period of five
years. During the initial six-month period of the agreement, the
singer is very sick and consequently cannot record. The studio
time that was blocked by the company had to be paid even
during the period the singer could not sing. These costs were
incurred by the company:
Legal cost of acquiring the copyrights $10 million
Operational loss (studio time lost, etc.) during start-up period $2 mil
Massive advertising campaign to launch the artist $1 million
Which of the above items is a cost that is eligible for capitalization
as an intangible asset? 17
 ◦ if an intangible asset is acquired in a
Acquired
business combination, the cost of
Intangible
Assets that intangible asset is its fair value
at the acquisition date

18
 Goodwill
◦ An asset representing the future economic
benefits arising from other assets acquired
in a business combination that are not
DEFINED
TERMS individually identified and separately
[IFRS 3] recognized
Non-controlling interest
◦ The equity in a subsidiary not attributable,
directly or indirectly, to a parent.
19
 Recognising and measuring goodwill
The acquirer shall recognise goodwill as of the acquisition date measured as the excess
of (a) over (b) below: [IFRS 3 – 32]
(a) the aggregate of:
(i) the consideration transferred measured in accordance with this IFRS, which generally
requires acquisition-date fair value (see paragraph 37);
(ii) the amount of any non-controlling interest in the acquiree measured in accordance
with this IFRS; and
(iii) in a business combination achieved in stages (see paragraphs 41 and 42), the
acquisition-date fair value of the acquirer’s previously held equity interest in the
acquiree.
(b) the net of the acquisition-date amounts of the identifiable assets acquired and the
liabilities assumed measured in accordance with this IFRS. 20
 Recognising and measuring goodwill

◦ Goodwill = Consideration
transferred + Amount of non-controlling
interests + Fair value of previous equity
interests - Net assets recognised

21
Choice in the measurement of non-controlling
interests (NCI)
IFRS 3 allows an accounting policy choice,
available on a transaction by transaction basis, to
measure non-controlling interests (NCI) either at:
[IFRS 3.19]
•fair value (sometimes called the full goodwill
method), or
• the NCI's proportionate share of net assets of
the acquiree.
22
P pays 800 to acquire an 80% interest in the
ordinary shares of S. The aggregated fair value of
100% of S's identifiable assets and liabilities
(determined in accordance with the requirements
of IFRS 3) is 600, and the fair value of the non-
controlling interest (the remaining 20% holding of
ordinary shares) is 185.

23
 NCI based on NCI based on
fair value net assets

Consideration
800 800
transferred
Non-controlling
185 120
interest
985 920
Net assets (600) (600)
Goodwill 385 320
24
Occasionally, an acquirer will make a bargain purchase,
which is a business combination in which the amount in
paragraph 32(b) exceeds the aggregate of the amounts
specified in paragraph 32(a). If that excess remains after
applying the requirements in paragraph 36, the acquirer
shall recognise the resulting gain in profit or loss on the
acquisition date. The gain shall be attributed to the acquirer
[IFRS 3 – 34]

25
The market value of company A's assets is 2 million USD,
Debt is 1 million USD Net assets are 1 million USD. And
company B buys company A for 950 thousand USD.

DR Assets 2.000.000
CR Liabilities 1.000.000
CR Cash 950.000
CR Gain on purchase 50.000

26
 The market value of company A's assets is 2 million USD,
Debt is 1 million USD Net assets are 1 million USD. And
company B buys company A for 1,1 million USD .

DR Assets 2.000.000
DR Goodwill 100.000
CR Liabilities 1.000.000
CR Cash 1.100.000

27
 B agree to pay $61,000 for 100% of the
business but values the net assets at only
Examples
$38,000, then the goodwill in B’s books
will be $61,000 - $38,000 = $23,000

28
 ◦ In some cases, an intangible asset may be
acquired free of charge, or for nominal
consideration, by way of a government
Acquired grant, such as airport landing rights, import
Intangible licenses or quotas
Assets
Fair value
Cost of I.A
Nominal amount +
directly attributable
expenditures 29
 Fair value’s
Acquired Intangible A.I acquired
Assets
Fair value’s
A.I given up
◦ Exchanges of
assets
Carrying
amount’s A.I
given up 30
 Internally generated intangible assets
Original and planned investigation undertaken with
Research the prospect of gaining new scientific or technical
knowledge and understanding

Application of research findings or other

knowledge to a plan or design for the
Development production of new or substantially improved
materials, devices; products, processes,
systems or services before the start of
commercial production or use
31
 Internally generated intangible assets
Research Phase Development Phase [IAS 38.57]

Ø No intangible asset An intangible asset arising from

development is recognized if, and only if
• Probable future economic benefits of
Ø Be recognised as
the asset under development
an expense • Intention to complete and use/sell it
• Resources adequate and available to
complete and use/sell
• Ability to use or sell the asset
• Technical feasibility
• Expenditures reliably measurable
32
 Examples
Project A: a new item A in the development phase with its expected
cost total of $200,000 is intended to complete . The company has
enough technical expertise and finance to complete this product. The
expected total revenue $2,000,000 once work is completed – probably
next year. Customers already placed advance orders for the product
after seeing demonstrations of its capabilities earlier in the year

Project B: New color-fast dye with its expected cost is $3,000,000 to

complete. The dye is being developed as a cheaper replacement for a
dye already used in the company, cost savings of over $10,000,000 are
expected from its use. Although the company has demonstrated that the
dye is a viable product, and has the intention to finish developing it, the
completion date is currently uncertain because external funding will have
to be obtained before the development work can be completed
33
Expense
v Examples of research activities include: [IAS38.56]
ü activities aimed at obtaining new knowledge
Internally ü the search for, evaluation and final selection of,
generated applications of research findings or other knowledge
intangible ü the search for alternatives for materials, devices,
products, processes, systems or services
assets
ü the formulation, design, evaluation and final selection
of possible alternatives for new or improved materials,
devices, products, processes, systems or services

34
Intangible Asset v Examples of development activities include:
Ø the design, construction and testing of pre-production or
pre-use prototypes and models

Internally Ø the design of tools, jigs, moulds and dies involving new
technology
generated
Ø the design, construction and operation of a pilot plant
intangible that is not of a scale economically feasible for
assets commercial production
Ø the design, construction and testing of a chosen
alternative for new or improved materials, devices,
products, processes, systems or services
35
 Which of the following should be classified as
development?

1. Company A has spent $200,000 investigating whether

a particular substance found in the Arctic Circle is
resistant to heat

2. Company B incurred $250,000 in expenses in the

Examples course of making new material for ski- equipment
which will be more durable

3. Company C found that a chemical compound is

harmful to the human body

4. Company D has incurred a further $300,000 to create

prototypes of a new heat-resistant body-suit for
humans 36
 Note:[IAS 38. 63-65]
vAn intangible asset internally, such as
salary and other expenditure incurred in
Internally securing copyrights or licences or
generated developing computer software
intangible
assets vInternally generated brands,
mastheads, publishing titles, customer
lists and items similar in substance shall
not be recognized as intangible assets.
37
 Cost of an internally generated
intangible asset:
Internally
vThe cost of an internally generated
generated
intangible asset comprises all
intangible directly attributable costs
assets necessary to create, produce, and
prepare the asset to be capable of
operating in the manner intended
by management
38
 Examples of directly attributable costs
are:
• Costs of materials and services used or
Internally consumed in generating the intangible
generated asset
intangible • Costs of employee benefits (as defined
in IAS 19) arising from the generation of
assets the intangible asset
• Fees to register a legal right
• Amortisation of patents and licences that
are used to generate the intangible asset
39
 Exclude:

ü Selling, administrative and other general

overhead expenditure unless this
Internally expenditure can be directly attributed to
generated preparing the asset for use
intangible
ü Identified inefficiencies and initial
assets operating losses incurred before the
asset achieves planned performance

ü Expenditure on training staff to operate

the asset 40
 Cost model
Carrying amount = cost – accumulated
amortization – accumulated impairment
losses
Measureme-nt
after recognition Revaluation model
Carrying amount = Revalued Amount
(It means: Fair value of revaluation date

41
 Revaluation Model

v How ?
• An upward revaluation Dr Asset
Cr Revaluation Surplus
recognized in OCI
• A downward revaluation
Dr Revaluation Loss
recognized in P/L Cr Intangible Asset
 v How ?
If you are reversing a previous
revaluation, you
Revaluation Ø Put an upwards revaluation through
Model P/L

Ø Put a downwards revaluation through

OCI
43
 Examples
⦁ Company R prepares financial statements to 31 May each year. On 31
May 2009, the company acquired an intangible asset for £50,000.
This asset was revalued at £60,000 on 31 May 2010 and at £35,000
on 31 May 2011.
⦁ Company S prepares financial statements to 31 March each year. On
31 March 2009, the company acquired an intangible asset for
£70,000. The asset was revalued at £55,000 on 31 March 2010 and at
£75,000 on 31 March 2011.
Assuming that all two companies use the revaluation model, explain
how each of the above transactions should be dealt with in the financial
statements. Ignore amortisation. 44
 Ø An entity assesses whether the
useful life of an intangible asset is
finite or indefinite

Ø Intangible asset with a Finite useful

Useful life of
life is amortized on a systematic
Intangible Asset
basic over the best estimate of its
useful life

Ø Intangible asset with an indefinite

should be tested for impairment
annually, but not amortized 46
 Examples
Intangible Asset Legal life Amortization
Patent 20 years The shorter of useful or
legal life
Copyrights author's life +70 The shorter of useful or
years legal life
Franchises or Contractual The shorter of contractual
Licenses agreements life or useful life
Trade Names or Unlimited (renewed Impairment test only (at
Trademark every 10 years) least annually)
In-Process R&D Unlimited Impairment test only
Goodwill Unlimited Impairment test only 47
 q Over useful life

q Begin when the asset is available for use

q Amortisation shall cease at the earlier of

the date that the asset is classified as held
for sale or
Amortization
q Residual value: is presumed to be zero,
unless a third party to acquire

q Straight-line method
q The diminishing balance method
q The unit of production 48
 v An intangible asset shall be derecognized:
◦ (a) on disposal; or
Disposals ◦ (b) when no future economic benefits are
expected from its use or disposal.

49
 v The gain or loss arising from the derecognition
of an intangible asset shall be determined as
the difference between the net disposal
proceeds, if any, and the carrying amount of
the asset
Disposals
v It shall be recognized in profit or loss when the
asset is derecognized. Gains shall not be
classified as revenue.

50
 v Disclosure section should be divided into
disclosures for
Ø General aspects for all intangible assets
Disclosure Ø Intangible assets measured after recognition
using the revaluation model
Ø Research and development expenditure
Ø Other information

51
◦ On September 30, 2021, Morgan, Inc., acquired all of the outstanding common
stock of Pathways, Inc., for $100 million. In addition to tangible assets,
Morgan recorded the following assets as a result of the acquisition:
◦ Patent $6 million
◦ Developed technology 3 million
◦ In-process research & development 2 million
◦ Goodwill 7 million
◦ Morgan's policy is to amortize intangible assets using the straight-line method,
no residual value and a six-year useful life.
Required:What is the total amount of amortization expenses that would appear
in Morgan's income statement for the year ended December 31,2021, related to
52
the items?
 Freitas Corporation was organized early in 2013. The
following expenditures were made during the first few
months of the year:

Attorneys’ fees in connection with the organization of

$ 12,000
the corporation

State filing fees and other incorporation costs $ 3,000

Purchase of a patent $ 20,000
Legal and other fees for transfer of the patent $ 2,000
Purchase of furniture $ 30,000
Pre-opening salaries $ 40,000
Total $ 107,000
Prepare a summary journal entry to record the $107,000 in cash expenditures53
On June 30, 2018, Saint John Corporation purchased a franchise for
$1,200,000. The franchise is expected to have a 10-year useful life with no
residual value. Saint John uses the straight-line amortization method for all
intangible assets. On December 31, 2018, the end of the company’s fiscal
year, Saint John chooses to revalue the franchise. There is an active market
for this particular franchise and its fair value on December 31, 2018, is
$1,180,000.

Required:

1. Calculate amortization for 2018. $60,000

2. Prepare the journal entry to record the revaluation of the patent.

3. Calculate amortization for 2019. $124,211

54